Europe’s robust financial-transactions tax

By Felix Salmon

January 30, 2013

Alex Barker has seen a draft, and it looks impressively robust. "
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The details of Europe’s new financial transactions tax won’t be made public for a few weeks, but the FT’s Alex Barker has seen a draft, and it looks impressively robust. The tax is being implemented by 11 countries, including most importantly Germany and France, and it’s going to be levied at two levels: 0.1% on securities trades, and 0.01% on derivatives trades. It’s also going to be very difficult to dodge: any trader whose institutional headquarters is in one of the 11 countries will have to pay the tax, as will all transactions taking place in those countries, and all transactions involving securities issued in those countries.

The tax will have two main purposes. The first is to raise substantial tax revenues on the order of $45 billion per year; the second is to discourage financial speculation. I’m hopeful on the former, but less so on the latter.

As Robert Peston and Avinash Persaud pointed out back in 2011, financial transactions taxes work pretty well: even the UK, which is implacably opposed to the European tax and which won’t ever join such a scheme, levies a surprisingly large 0.5% tax whenever anybody — anywhere in the world — trades a UK stock. And yet, somehow, London remains the first choice for international companies looking for a place to list their shares.

The European tax, which is much smaller than UK stamp duty, will similarly have little effect on how and where financial markets operate. The “if you tax me, I’ll just move elsewhere” threat is a pretty empty one, in practice, especially if you have a carefully-drafted law which makes tax avoidance difficult, and if you’re talking about established financial institutions rather than individuals. Count me on the opposite side of Steve Slater: large banks won’t avoid this tax, because doing so would be both politically suicidal and practically incredibly complex. Especially in a world where tax laws can be changed quite quickly, if any obvious avoidance is noticed.

So I think that the financial transactions tax will actually be very good at raising money — possibly even good enough, over time, that the rest of the EU will come around to it. Maybe even London could decide to swap out its stamp duty and join a unified European system instead, especially if a less City-friendly government is elected in 2015. That’s one reason I like the idea of half the EU going ahead with this scheme while the other half stays out: it will provide a proof of concept to persuade the nay-sayers.

On the other hand, I doubt that speculators will find this tax particularly off-putting. Europe doesn’t suffer from the high-frequency trading that has overtaken the U.S. stock market, and these taxes are low enough that any remotely sensible financial transaction will remain sensible on a post-tax basis. It’s possible that total trading volume might decline a little bit in some markets, and that would be fine: no one thinks it’s too low at the moment, and in the derivatives markets especially, increase in volumes generally just translates into increased rents being paid to big sell-side banks. But I’m not someone who believes that speculators are causing a noticeable amount of harm in European markets: as far as they’re concerned, the financial transactions tax is likely to make very little difference to a group of people who are not much of a problem in the first place.

One of the themes in Davos this year was a series of EU politicians pushing pretty hard for a big EU-U.S. trade deal, while the U.S. seemed to feel much less urgency. The financial-transactions tax won’t help on that front: it will widen the gap even further with respect to the treatment of the crucial financial-services sector. Still, it’s good to see real leadership here from France and Germany. They’re going to implement a sensible tax, which will raise much-needed revenues at minimal societal cost. What’s more, if you pierce corporate veils to find out which individuals will end up paying the tax, it’s going to look a lot like a wealth tax, rather than an income tax. That’s good news, in a world where the wealthy tend to pay much lower taxes than those with high incomes.

So let’s hope that this tax gets introduced; that it works; and that the rest of the world, seeing the costs and the benefits, starts to follow suit and sign on too. The area covered by the initial 11 countries is big enough that the tax will work well at inception, but as more and more countries join the scheme, the tax will become increasingly efficient and effective. Maybe, eventually, it could even incorporate the U.S.